Products January 23, 2009

Vanguard Unveils Bond Fund for Asset Allocation Offerings

The Vanguard Group has introduced a bond index fund for use by Vanguard funds, including Vanguard's Target Retirement and LifeStrategy funds, which invest in other Vanguard offerings.
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A Vanguard news release said Vanguard Total Bond Market II Index Fund seeks to track the performance of the Barclays Capital U.S. Aggregate Bond Index (formerly the Lehman Brothers U.S. Aggregate Bond Index). The new fund shares the same portfolio management strategy and investment policies as the $65 billion Vanguard Total Bond Market Index Fund, which was introduced in 1986.

Vanguard Total Bond Market II Index Fund will only be available for use by Vanguard funds-of-funds and other similar investment products; shares of the new fund will not be available for direct purchase by investors, the company said in the announcement.

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Vanguard said the offering is the primary bond component of Vanguard’s 11 Target Retirement and four LifeStrategy funds, which regularly rebalance assets among the underlying funds to maintain their respective target asset allocations.

“It is clear that our funds-of-funds offerings will become increasingly large shareholders of Vanguard Total Bond Market Index Fund. To mitigate the impact of future rebalancing activity on that fund, we believe it is necessary and prudent to introduce a second bond market index fund,’ said Vanguard CIO George U. Sauter, in the announcement.

The assets currently held by the Target Retirement and LifeStrategy funds in Vanguard Total Bond Market Index Fund will be transferred to Vanguard Total Bond Market II Index Fund.

The Investor Shares of Vanguard’s two bond market index funds have the same expense ratio of 0.19%, Vanguard said.

The Markets January 23, 2009

Economic Experiences Influence Investment Behavior

A recent paper suggests the economic times people live through have a significant impact on how they invest.
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In their study, Stefan Nagel, Associate Professor of Finance, Stanford Graduate School of Business, and Ulrike Malmendier, from the University of California, Berkeley, found individuals who had experienced high stock market returns throughout their lives were less risk adverse, more likely to participate in the stock market, and more inclined to invest a higher percentage of their wealth in stock. In contrast, the researchers found those who experienced high inflation throughout their lives were less likely to invest assets in bonds, preferring inflation-proof cash-like investments, according to the Stanford Graduate School of Business News.

The study indicated that the more recent an economic experience, the more impact it had on investor behavior overall, and young people tended to be more affected by recent events than older people. “Because they have a limited history, they are much more likely to change their behavior due to a single year’s performance in the markets than an older person, who might have several decades of experience,” said Nagel, in the news report.

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For example, the low returns in the 1970s made younger investors more risk averse through the 1980s, as they pulled their money out of the stock market at higher rates than older investors, who still had memories of better returns in the 1950s and 1960s giving them confidence that the market would rebound.

The news report noted that the implications of this study for how things might play out in the next few years are notable. Because of recent — and in some cases massive — losses, investors may be loathe to put money back into markets even after they stabilize. “This can amplify recessionary effects, and prolong economic downturns,” said Nagel, in the news report.

Nagel and Malmendier were not able to verify whether the severity of a downturn or overly high returns of a prosperous period had a more lasting impact on investors than a milder economic event.

To test their hypothesis, Nagel and Malmendier took 40 years of cross-section data on household asset allocation from the Survey of Consumer Finances, and extracted portfolio allocations, risk aversion metrics, and stock-market participation. They controlled the model to eliminate differences due to demographics, wealth, income, and other variables.

The research paper, “Depression Babies: Do Macroeconomic Experiences Affect Risk-Taking,” is located here.

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